Facebook's Rally: Can It Last?

Facebook Inc.'s buoyant stock price has surprised the doubters, including me, by weathering a flood of shares entering the stock market.

The stock's run has been so impressive that it even brought a measure of relief to the social-networking company's underwriters, led by Morgan Stanley.

Investors might be anticipating a big year-end finish for Facebook. Maybe champagne is going on ice to celebrate the stock's rebound recently. But happy shareholders, analysts and other "friends" of Facebook shouldn't forget all the challenges still facing the stock.

There will be speed bumps ahead for Facebook as 2013 begins. The biggest might be delivering on expectations created by the stock's recent, resilient rally.

For now, though, let's acknowledge just how remarkable Facebook's stock-price turnaround has been.

Since late August when the stock was hovering at $19 a share, more than 1.5 billion shares, or about 70% of the company's public float today, hit the market. The shares, issued mostly to insiders, were freed by the expiration of lockup agreements.

ENLARGE

Facebook stock still is down 27% from its IPO price of $38. On a relative basis, Facebook is down even more when you consider the tech-oriented Nasdaq Composite Index is up 6.5% during the same period.
Agence France-Presse/Getty Images

That was a dangerous spot. Once freed, the expectation went, Facebook insiders would sell. And why not? The trajectory of the shares was that of a sinking ship.

After pricing the initial public offering at $38 in May, the stock lost 50% of its value during the next 12 weeks. As the share price fell below $18, more than one analyst said Facebook's fair value was less than $15 a share.

Since then, as the size of Facebook's public float nearly tripled, the shares surged 56%. They have gone from a low of $17.55 in early September to $27.71 as of Wednesday's close.

There are lots of reasons for the turnaround. The biggest: a $2 billion stock buyback announced Sept. 4. As a matter of value, the move wasn't significant. It represented just 5% of the company's stock-market value at the time. Its real value was as a gesture; the move showed Facebook was concerned about its value and image among investors.

Perhaps just as significant was a simultaneous pledge by Mark Zuckerberg, Facebook's founder and chief executive, that he wouldn't sell his shares or exercise options for at least another year. In his first public appearance since the IPO, at TechCrunch SF on Sept. 8, Mr. Zuckerberg said he was disappointed but unfazed.

"It's not the first up-and-down year we've ever had," he said.

Moreover, Mr. Zuckerberg assuaged investors who were concerned about Facebook's effort on mobile platforms. Later, the company followed up with third-quarter results that beat analysts' expectations and a welcome surprise that 14% of revenue came from its mobile platform.

Since then, the pressure has receded.

The stock still is down 27% from its IPO price of $38. On a relative basis, Facebook is down even more when you consider the tech-oriented Nasdaq Composite Index is up 6.5% during the same period.

Two more waves of shares will hit the market in the next six months. The next pile comes Dec. 14, when a lockup on 149 million shares expires. In May, another 47 million will become eligible for sale.

And those are just the logistical stock issues. Facebook the company might have surprised analysts, but it still posted a $59 million loss for the period.

The company also must live up to increased expectations, especially next month when Facebook reports year-end results. Analysts, inspired by the third quarter, have raised the bar. Many have lifted their price targets to $32 or more.

An even bigger but less-talked-about hurdle is the balance between advertising and user experience. Advertisers and users are both customers fighting for space on the Facebook platform, whether it is a mobile app or Web page.

It isn't a coincidence that Facebook's revenue increases have tracked with advertisers getting a bigger slice of the Facebook page. In August alone, the company launched two new mobile-ad products. An e-commerce tracking tool started in November.

This has led to complaints from users who claim their experience has become diminished. Facebook is trying to become less dependent on advertising (among its goals is to become an e-commerce platform), but commerce also fights for space with your friends' and family's vacation pictures.

And if you don't think people are betting on an exodus, you haven't visited social-networking sites such as Google+, Path and Pinterest.

To put it simply, the biggest problem with Facebook is that no company has staked out this ground before. Yes, Facebook shares similarities with Google Inc., Amazon.com Inc. and Myspace, but Facebook is clearly a new species.

That's why the stock was able to be priced so high. It's why it fell to bone-crushing depths. It's why Facebook the stock is, for better or worse, the most fascinating one on Wall Street.

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